Euro to decline in parity with US Dollars:
On Tuesday, euro reached in parity with US dollars for the first time in 20 years. The currency has been declining consistently amid fear of recession and, threats from Russia to reduce gas supply to Germany and other euro zone countries. The stress on the currency is also beyond the German gas shortage, as there are power cutbacks in France contributing to the decline. This means, there will be requirement of more euros to settle a payment in dollars. The export-oriented manufacturers, automobiles and chemicals sector are benefited the most from the currency decline. There is maximum distress in import-oriented businesses. Europeans tourist have to spend more euros for their trips to US or other nations who have pegged there currency to dollar.
The impact of falling currency differs in various sector based on their dependence on foreign exchange rates. There will be more requirement of euros, if a business imports raw materials or other products. The goods that are imported in euro zone, only 40% are settled in euro rest is settled in dollars. For instance, oil and gas are imported and paid in dollars, but due to the Ukraine crisis, there was a surge in prices. This results in inflation and slowdown in the economy. A weakening in euro rates can have actual disruptions in costs. On the other hand, if businesses export outside the euro area, they benefit from the fall as prices become more competitive.
There is a boost in exports of European goods and services as the currency falls, making the currency more competitive. However, this won’t have much significance as inflation due to the Ukraine war will diminish all benefits. If there is no slowdown in the economy, they can repay their debt obligations faster and get rid of them. For nations who have issued dollar designated debt, this will increase the cost of debt repayment.
In order to curb inflation and declining exchange rates, ECB (European Central Bank) might raise interest rates more aggressively. If euro depreciates further, there would create difficulty in EBCs efforts to restrain inflation.
